Foreclosure lawsuit throws segment of housing market into turmoil
Jan 2011 11

As you probably heard, the Massachusetts Supreme Court handed down a decision last week that affects the entire US residential real estate market.

Without retreading all the news, basically all you need to know is that the Ibanez ruling means lenders need to do a much-better job of filing all their paperwork before trying to foreclose on anyone’s home. In the Massachusetts’ case, it didn’t. The lender didn’t track its loan from origination through securitization, so it couldn’t prove it actually owned the loan, that it owned the house, so it shouldn’t have been able to foreclose.

So, banks will need to take a breather while they do all the research and pull together all the papers.

The (un?)intended result of this is, I think, foreclosures will slow down, by a lot. While this seems like a nice thing, for those who are about to lose their homes, all it does for the rest of us is delay any housing recovery, and, by association, any improvement in the economy.

That’s the worst fear, of course.

There’s another, related issue. Suppose you are an investor or even a home-buyer who is interested in a property currently in foreclosure. You’d like to buy it. However, why would you risk your money if the ownership of the home cannot be proven? How much do you trust the bank to have done all the paperwork in order to get a “clean title”. Cases have happened where new owners move into their properties and then the courts come along and say, “sorry, dude, you don’t own this house, because your lender had no right to sell it.”

That’s a problem! (I feel comfortable making at least one recommendation on this: Make sure you buy homeowners’ title insurance!)

While I could recommend to you that you never buy a house in foreclosure, that’s for me to say. Many, many people have invested in these properties and made small and huge fortunes off of them.

Doing so requires more patience than I could ever have and more risk than I could ever handle.

More on the ruling and its effects:

Wall Street Journal: Two Banks Lose in Foreclosure Cases

Boston Globe: Galvin seeks foreclosure tribunal

Massachusetts Real Estate Law Blog: Ibanez Foreclosure Ruling Upheld

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